Britain's motor industry yesterday responded cautiously to a package of tax changes which will see cuts in VAT but increases in fuel and vehicle excise duty.

Though some of the changes were welcomed, there was concern the package did not go far enough to kick start an industry in which sales of new cars have slumped by more than 20% in each of the past two months.

Paul Everitt, chief executive of the Society of Motor Manufacturers and Traders, said Darling was providing incentives but more needed to be done.

"The motor industry faces a set of unprecedented market conditions. Urgent action is required to boost demand for new vehicles and ease pressure on UK automotive suppliers," he said.

Alistair Darling said it was right to have a tax system which reflected the environmental impact of different cars. He said he was pressing ahead with plans to increase the number of vehicle excise duty bands from seven to 13, as well as a differential first-year rate on new cars bought from April 2010.

"I intend to go ahead with the introduction of new bands, reflecting fuel efficiency. But it would be wrong to do this in a way that places undue burdens on motorists at this time," he said.

The tax band changes will be phased in. For next year duty rates for all types of car will increase by a maximum of £5, and, from 2010 the maximum rise for the most polluting cars will be £30. Less polluting cars will see no increase or a cut of up to £30, Darling said.

Treasury figures show that by 2010-11 the standard tax rate for a car with low emissions of between 121 and 130 grammes of CO2 a kilometre will fall from £120 to £90. However, the first-year tax rate will be zero for lower polluting cars. For the most polluting cars the first-year rate will be £900 and the standard rate £435.

The Retail Motor Industry Federation said the delays would give the industry more time to adjust.

However the AA president, Edmund King, said the changes appeared to be a temporary reprieve. "Gordon [Brown]'s short-term tonic for motorists, whilst welcome, is not enough to bring back the fizz to the new and used-car market."

Darling said he was planning to offset the reduction in VAT on fuel by increasing fuel duty "by an amount which should keep the overall cost to consumers the same this year".

King dismissed the move as "giving with one hand and taking away with the other. By increasing fuel duty whilst reducing VAT shows that the chancellor is playing roulette with global fuel prices and could lose his gamble."

Eric Wallbank, Ernst & Young's UK head of automotive, said the measures would not "lift the [car] market off the floor". Many people were unaware of the VED changes, while the reduction in VAT would reduce prices by only a few hundred pounds.